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RBA meeting awaited

By Nick Parsons

Like all of its counterparts worldwide, the Reserve Bank of Australia would always characterize itself as ‘data-dependent’. It doesn’t have a fixed view on monetary policy and the appropriate level of interest rates. Instead, it watches the incoming economic numbers, offers interesting and thought-provoking analyses of them and adjusts its signaling to market participants as the data themselves evolve. When reading through the economic numbers of the last week, it will note Thursday’s better than expected Australian international trade figures were followed by a very poor set of retail sales data. We suggested here that better trade numbers told us more about the external environment than they did about the state of domestic demand. And, though they will definitely give a boost to GDP, this wouldn’t necessarily translate into higher employment, wages or spending power in Australia. This was exactly how it played out. Thursday’s data saw AUD/USD squeeze up to a best level of 0.7724 but it couldn’t even hold onto a US 77 cents handle for as long as 24 hours and ended the week back down at 0.7650. There’s not a lot other than RBA signals to watch this week for the AUD. After Tuesday’s Board meeting, the focus will then shift to the Statement of Monetary Policy (SoMP) on Friday.

In the 5 weeks since the New Zealand elections and amidst the uncertainty surrounding the eventual formation of a Labour-led government, the Kiwi Dollar had been hit hard, losing more than 5 cents against the USD and 4 cents against its trans-Tasman cousin. Last week potentially was the week in which the NZD began to find some support and we’ll soon be able to pass judgment on whether it might actually have turned a corner. The latest labour market data showed the strength of the economy which Prime Minister Jacinda Ardern inherits. Unemployment for the three months ending September was 4.6 per cent, 0.2 percentage points lower than the prior quarter and the lowest level since the December 2008 quarter, whilst wages grew 0.7% in the quarter to take the annual rate of growth up to a five year high of 1.9%. A short-covering rally pushed NZD/USD to a best level of 0.6935 on Friday before ending in New York at 0.6907; almost 70 pips above its recent closing low of 0.6832. For the week ahead, the key event is Thursday’s RBNZ meeting when we’ll get updated forecasts on interest rates and CPI.

It was very much a week of two halves for the GBP which was bought very heavily on Monday and Tuesday in anticipation of the Bank of England’s first hike in interest rates for 10 years and was then sold just as hard after the announcement was made. GBP/USD opened around 1.3125 and by Wednesday morning had gained almost 2 cents to a high of 1.3310. After the BoE announcement and Press Conference the pair dumped almost 3 full cents to a low of 1.3030 and even a better than expected set of service sector PMI’s saw the GBP only improve by around 40 pips to end the week in New York at 1.7046. As if the unfolding Brexit negotiations, Bank of England communications issues and weakening economic data were not sufficient reasons to be bearish of the GBP, the last few days have also seen an unfolding domestic political crisis. The minority UK Conservative Government – which now relies on Ulster’s Democratic Unionist Party to keep it in office – is now engulfed (along with its Labour Party Opposition) by scandals involving allegations of improper sexual conduct. Last Thursday saw the resignation of Defence Secretary Michael Fallon and there is simply no way of knowing how many more revelations are going to appear. Against this background, it would be no surprise if international investors continued to hold underweight positions in the British Pound and its path of least resistance seems very much still to the downside.

With the new Fed Chairman now announced and a fresh FOMC Statement delivered last Wednesday, we’d expect monetary policy this week to take something of a back seat for the US Dollar. Instead, the focus will be on any foreign policy announcements from President Trump’s 10 day trip to Asia and the latest twists and turns in the passage of his domestic tax reform proposals. These formed a central plank of his campaign pledge to “Make America Great Again” but were delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office. From November 9th 2016 to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. None of this materialized and by late September, the USD Index had slid to just 90.9. A subsequent attempt to kickstart the fiscal agenda once again raised hopes of meaningful reform and the index ended last week up at 94.68; its best closing level since mid-July. The President’s 429-page “Tax Cuts and Jobs Act” still has no guarantee of passing any time soon but it is this which is now crucial to the US Dollar outlook.

Over the past week the EUR/USD exchange rate has managed the remarkable and almost unprecedented feat of staying on the same big figure for every single minute of the 120 hours in which the foreign exchange market was open for business. Thursday’s high was 1.1672 and Friday’s low 1.1602. Mr Draghi and his ECB colleagues have previously complained about unwelcome and unwarranted volatility of the exchange rate and will surely have been delighted by the price action of the past week. Investors have seen a string of very positive economic numbers right across the Continent of Europe but also saw that CPI was a touch lower than expected in both Germany and the wider Eurozone. For the week ahead, there’s not much economic data to be released. ECB speakers include Draghi, Lautenschlaeger, Nuoy, and Angeloni on Tuesday whilst it’s the turn of Bank of France Governor de Galhau and Bundesbank President Weidmann on Thursday. Often these speeches are used to ‘reset’ perceptions of policy and to help correct any unwelcome post-ECB movements in foreign exchange and interest rate markets. With price action as it was last week, however, there’s nothing to correct. Expect, instead, to hear the sound of happy central bankers across the Eurozone and be prepared for another quiet few days for the Single European Currency.

The Canadian Dollar had a quite lively, and ultimately pretty good week as the incoming economic data swung around from disappointing to quite good. It opened Monday morning at USD/CAD1.2817 but by Wednesday the pair was up at 1.2905 (USD stronger, CAD weaker) after a pretty poor set of GDP numbers. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries. In the second half of the week, the CAD caught a bid despite soft manufacturing PMI data and stood at 1.2828 just before labour market data in both the US and Canada were released simultaneously on Friday. US payrolls and earnings both missed consensus forecasts whilst Canadian employment grew a faster than expected 35,300. USD/CAD hit a low of 1.2734 before ending the week at 1.2763, whilst AUD/CAD tumbled from Thursday’s high of 0.9908 to end the week at 0.9763. The week ahead looks a bit quieter with no major domestic economic data releases on the slate and no BoC meeting until December 6th.